Alert: Osborne said the Bank of England should act if house prices get out of control

The UK must take swift action to rein in risky mortgages, the International Monetary Fund (IMF) urged today as it warned soaring house prices pose a risk to the economic recovery.

It called for ‘targeted and timely’ measures to clamp down on high loan-to-income ratio home lending, adding pressure on the Bank of England to act when it issues its latest report on financial stability later this month.

Speaking ahead of the publication of the IMF report this morning, the Chancellor George Osborne said he agreed with its contents and that the Bank of England ‘should not hesitate’ to take action if runaway house prices start to pose a risk to the economy.

He warned that Britain needs to be ‘alert’ to rising prices and the risk of excessive levels of debt.

However the Chancellor appeared to suggest that it was up to the Bank and not the Treasury to act if there are concerns.

The comments from the International Monetary Fund
were made in an assessment of the state of the UK economy.

The IMF urged ministers to consider an early end to the flagship Help to Buy scheme offering mortgage guarantees and loans for those struggling to find a deposit.

It warned of the risks posed by the housing market as well as historically-low productivity in the economy.

'House price inflation is particularly high in London, and is becoming widespread. So far, there are few of the typical signs of a credit-led bubble,' it said.

'Nonetheless, a steady increase in the size of new mortgages compared with borrowed incomes suggests that households are gradually becoming more vulnerable to income and interest rate shocks.'

It also called for a step up in new house building programmes, warning that prices are being driven up by a shortage of housing. 'Macroprudential and monetary policies can only be temporary palliatives to an underlying problem,' it said.

IMF managing director Christine Lagarde said: 'We have recommended that some macro-prudential measures be considered by the UK authorities and that this be done with a view to addressing not so much house prices but financial risk.

'We also believe it should be done in a gradual, flexible way because the authorities need to assess whether those measures work, how they work.

'Clearly it is something that needs to be watched and depending on circumstances, on pricing levels, those macro-prudential measures should be further activated if necessary.'

The
IMF acknowledged that its warning in a similar report
last year that the UK Government should change course to stimulate
recovery has been proven incorrect.

Mr Osborne said earlier today he expected to
agree with everything said by the organisation's managing director
Christine Lagarde when she unveils her findings at the Treasury.

Mr
Osborne said that he agreed with Ms Lagarde and with Bank of England
governor Mark Carney on the need to be ‘alert’ against the possibility
that a build-up of excessive debt could present a risk to the recovery.

The
Chancellor told BBC Radio 4's Today programme: ‘We need to be alert to
the build-up of debt in the housing market, we need to be alert when we
see house prices rising.’

He
said he had established a mechanism, through the Bank's Financial
Policy Committee, to monitor and react to signs of the housing market
overheating.

‘We
have created - this Government, me as Chancellor - the mechanism to
deal with that,’ he said. ‘We have given the Bank of England the tools
to do the job and they should not hesitate to use those tools if they
see these developments turning into a risk for the British economy.’

Asked whether this was a decision for the Bank which he would take no view on, Mr Osborne responded: ‘I have a very strong view. We need to keep a close eye on these developments and as and when we think they are a risk to our economy we should act, and I have created the mechanism to do that.’

The report follows the publication of a series of reports this week showing that house prices continue to surge around the country.

Prices surged again in May, according to Halifax

Figures
released by Halifax yesterday showed house prices continued to rocket
last month, with the average home rising by £6,940.

Annual house price inflation was 8.7 per cent, on Halifax's measure, accelerating from the 8.5 per cent seen in April.

The
3.9 per cent month-on-month jump in property prices was the highest
since a 4.2 per cent increase was recorded in October 2002 and takes the
average home's value to £184,464, across the UK - almost £18,000 higher
than a year ago.

On Tuesday, building society Nationwide reported that house prices had reached a new all-time high, standing at £186,512 on average.

Speculation has been mounting that the Bank of England could recommend some measures to calm the housing market, which could possibly include diluting the Government's Help to Buy mortgage support scheme.

There have already been signs that banks are deciding to put stronger curbs on high-value mortgage lending, which have been targeted at taking some of the steam out of the London market in particular.

In agreement: The Chancellor says he shares the view of Bank of England governor Mark Carney and IMF managing director Christine Lagarde on the need to keep an eye on house prices

Both Royal Bank of Scotland and Lloyds Banking Group have announced that people applying to take out a mortgage worth more than £500,000 will see the amount they are allowed to borrow limited to four times their income.

The moves by the banking giants have arrived ahead of any action from the Bank of England's Financial Policy Committee, which is 'charged with a primary objective of identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system.'

Property market watchers and economists are waiting to see whether the FPC will act to try and cool house price inflation. Its Financial Stability report is due on June 17.

Record leap: The average value of a home jumped by £6,940 during the month. It is the biggest increase in a single month since records began more than 30 years ago - and comes amid rising fears of a property bubble

The Bank's most recent inflation report highlighted house prices and pointed towards the FPC as a candidate for taking any action, if it decided it was needed, rather than an earlier than planned rise in interest rates.

Ms Lagarde will unveil the IMF's annual Article IV assessment of the UK economy alongside the Chancellor at the Treasury.

The Financial Times reported that the document would drop criticisms of the coalition Government's overall economic strategy expressed last year, when chief economist Olivier Blanchard said Britain's deficit reduction strategy was ‘playing with fire’, but would highlight the UK's rapidly improving housing market as a potential threat to a sustained upswing.

Mr Osborne has had advance sight of the report but refused to reveal details of its contents.But he said: ‘What I think you are going to hear from her is a lot of support for what we are doing in Britain, support for our economic plan.’

He added: ‘I think you will find I am going to agree with everything the IMF say later today.’

Mr Osborne acknowledged that the report would flag up risks to the economy, but added: ‘Their job is to point out the risks in the economy. There are risks from weaknesses abroad, like weaknesses in the euro area.'

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Bank of England should rein in housing market if it sees risk, says Osborne